Skip to main content

New Clause—(Allowances For Obsolescence Of Buildings)

Volume 440: debated on Wednesday 16 July 1947

The text on this page has been created from Hansard archive content, it may contain typographical errors.

(1) On and after the sixth day of April, nineteen hundred and forty-seven, there shall be made to any person who incurs, or has prior to the said day incurred, capital expenditure on the acquisition or construction of a building used for residential, commercial or other purposes, not being an industrial building or structure within the meaning of the Income Tax Act, Act, 1945, the allowance hereinafter mentioned.

(2) In the case of any building to which the foregoing Subsection applies an allowance shall be made during every year up to and including in the case of a residential building the ninety-ninth year and in the case of any other building to which this Section applies the seventy-fifth year, in each case from the date of the construction of the building, equal to one ninety-ninth or one seventy-fifth part as the case may be, of the cost of the building excluding therefrom the value attributable to the site thereof. In the event of the relevant interest in a building being sold before the building is used, Section five of the Income Tax Act, 1945, shall apply to buildings to which the foregoing Subsection applies as it does to industrial buildings.

(3) The said allowance shall be made during the unexpired term of the lease under which the land is held or during such period as the said building is in the ownership of the person by whom the said expenditure was incurred whichever is the shorter.—[ Sir J. Mellor.]

Brought up, and read the First time.

I beg to move, "That the Clause be read a Second time."

The purpose of this Clause is to provide obsolescence allowances for buildings generally, so that provision can be made for their replacement out of untaxed income. I ought to mention at once that I have some private interest in this matter. It has been a conspicuous omission in our Income Tax law that no allowance whatever has been permitted for the depreciation of buildings, except in the case of industrial buildings. That, of course, is quite apart altogether from the ordinary allowances for repairs, which is an entirely different matter. All buildings must be regarded as wasting assets to a greater or lesser degree. The Income Tax Act, 1945, made provision for obsolescence allowances in the case of industrial buildings, and the purpose of this Clause is, so far as possible, to adapt the provisions of that Act to buildings generally.

The new Clause does not seek to apply the initial allowances, which were a feature of the Act of 1945. But it seeks to apply in a similar way for other buildings the annual allowances which were provided by that Act for industrial buildings. I recognise that the terms of this Clause are inevitably incomplete. Unfortunately, owing to the Rules of Order, it would not have been permissible to include provision for balancing charges which were involved in the Act of 1945. The House will remember that that Act involved a system of balancing allowances, and balancing charges. As it would be out of Order to introduce something which imposes a charge, the terms of this Clause are necessarily incomplete. The main idea of the Income Tax Act, 1945, in regard to industrial buildings was to enable them to be written off out of untaxed income over a period of 45 years. The site value, of course, does not enter into the picture. In this Clause it is proposed that provision should be made so that commercial buildings can be written off over a period of 75 years, and residential buildings over a period of 99 years.

I must confess that in many respects the terms of the Clause cannot be regarded as satisfactory. I am seeking to raise a very important principle. The Clause is not satisfactory in so far as its provisions apply to the amortisation of leasehold interests, because obviously the rate of amortisation of leasehold interests should be related to the term of the lease, and not to the life of the building. What I am seeking to raise today is the vital principle that some allowance should be made for the obsolescence or depreciation of all buildings. If it appears convenient to extend the principle of the Income Tax Act, 1945, I shall most cordially welcome it. In the discussions on the Income Tax Bill in 1945, it was made clear from the Government Benches that obsolescence allowances for industrial buildings was as far as the Government could then go. It is now time that a further advance was made, and I am encouraged in that view by a document entitled the "Report of the Central Advisory Committee on Estate Development and Management." In February last, a copy of that report was sent to all local authorities by the Ministry of Town and Country Planning. Therefore, I assume that its terms are commended by the Government. In that report I find some interesting passage which have a bearing upon this issue. It is stated, on page 18, in paragraph 65:
"The need for periodic redevelopment renders it very desirable that lessees should ' write off ' their buildings over the period of their estimated useful life. … We recommend this practice and suggest that local authorities should advise its adoption by all lessees."
If that is a right idea, why should the individuals concerned be expected to do that out of taxed income? I submit that it is a thoroughly desirable process that income should be set aside sufficiently to replace a wasting asset in due course. The Chancellor is continually urging upon this House the importance of ploughing back income into capital. I agree with him, and it is one way of preventing a further extension of the inflation which we already have. The Royal Commission on Income Tax, which reported in 1918, offered little encouragement. It appeared to take a stand against the amortisation of any wasting assets. There was at that time an allowance for mills and factories, but I must admit that the Royal Commission reported against any extension of such allowances. Since 1918 things have changed a good deal. First of all, in 1918, the standard rate of Income Tax was 6s. in the Again, since 1918, the position of landlords has become less favourable for one reason and another. At the present time they have to pay Income Tax upon the actual rent they receive, whereas in 1918 they were in the more favourable position of paying Income Tax upon an assessment which was closely associated with the rating assessment. Having regard to the terms of the report from which I have just been reading, and which I presume has the blessing of the Government, I think we can say that the time has arrived when the matter should be considered.

With regard to the appropriate period over which commercial and residential buildings respectively should be written off, this report again throws light upon the subject. I recognise that there must be considerable variations in the probable life of buildings, and that it is difficult to lay down any rule. Indeed, it might be desirable that the allowance should he adjusted according to the probable life of a particular building, but I will not go into that question. In that report, I read:
"… the length of lease of building sites in a central area should be governed by the likely period of useful life of the proposed development as a whole…With some types of property this object may be achieved by adopting the common practice of granting ground leases for 99 years. Under modern conditions, however, commercial development —and particularly shops in central areas—may become obsolete within a substantially shorter period. the time when the general run of buildings in a central area will become obsolete will almost certainly be reached considerably before the end of 99 years
We therefore recommend that, in the interest of good estate management, the general practice in regard to commercial and industrial buildings in central areas should be to grant ground leases for an average term of 75 years."
5.45 p.m.

It will be remembered that under the Income Tax Act, 1945, provision was made to write off industrial buildings in 45 years. Therefore, I do not think that this Clause is being over-ambitious in asking that commercial buildings should be written off over 75 years and residential buildings over 99 years. I hope that we shall have a full reply on the question of principle. I recognise that this Clause would require a good deal of adjustment and adaptation before it could satisfactorily be incorporated in the Statute, but I hope that the principle of this matter will be fully discussed this afternoon.

I beg to second the Motion.

I need hardly remind the Chancellor that what we are asking for in this new Clause is not a new principle, nor is it the first time that this question has been raised in the House. The principle is, of course, that there should be an allowance for any wasting asset. That principle has already been accepted in a limited number of cases. It has been accepted in the case of industrial buildings, and I think also in the case of patents. Is there any valid reason why an allowance should not also be made in the case of commercial and residential property? In other words, where there is any clearly defined wasting asset, why should not the same principle be applied, in particular, as my hon. Friend the Member for Sutton Coldfield (Sir J. Mellor) has just said, with regard to leaseholds? I presume that the Chancellor would agree that a leasehold is, in fact, a wasting asset. I hope that he will not argue that the price which is paid for a leasehold takes that fact into account.

that would be valid If taxation were to remain at a static figure, but taxation varies from time to time.

In respect of whom is the leasehold a wasting asset? The landlord holds a valuable and iniquitous asset.

I do not want to argue on that matter. The fact is that the Chancellor is very keen, I think quite rightly, on profits being ploughed back into industry. Here is a case where, as my hon. Friend has pointed out, there is an opportunity for that to be done.

This is not the first time that this matter has been brought up. I would refer the Chancellor to what was said by his predecessor in 1944 He said:
"The position of leaseholds is much more complicated and while I would like to propose outright the application of a similar principle to that which I have outlined for patent rights, I must say no more than that this subject will be further considered."
The Treasury has now had three years to consider it.

the Chancellor has taken great pride in the fact that he has removed anomalies with regard to duties in other directions. I suggest to him that this is an opportunity for removing yet another anomaly, and an opportunity to be quite logical and apply to the whole range of buildings a principle which has already been accepted.

I am sorry to say that we feel that we cannot accept this new Clause for a variety of reasons. First, I will deal with the technical reasons. It would be quite wrong of me to invite the House to reject a proposal simply because it was technically incomplete, having the advantage of the assistance I have from experts. This new Clause, as the hon. Member for Sutton Coldfield (Sir J. Mellor) said, as a matter of drafting has a radical defect which he himself indicated. It has no provision for any balancing charge. If it had, no doubt it would have been ruled out of Order because it would have imposed an additional charge. Without a balancing charge provision this would simply open the door to the widest possible evasion. People could sell oft an asset from one purchaser to another at increasing prices and, by so doing, procure a grant of gradually growing allowances. Therefore, as a pure matter of drafting, it has a radical and not a technical defect. It has a defect which cannot be cured within the scope of this Debate.

However, in inviting the House to reject the Clause I would not stand upon that, because the objection which I want to raise is really a fundamental objection of principle. The cost of the hon. Gentleman's proposal, though it is difficult to estimate, would be in the region of X20 million. In order to justify a loss of revenue of that sort it would be necessary to make out an extremely strong compelling case. I submit to the House that whatever can be said and whatever has been said in favour of this suggestion, falls very far short of any such compelling case. Reference has been made to the Income Tax Act of 1945. The whole object of this new Clause, as was indicated both by the mover and seconder, is really to assimilate the provisions of the Inca Tax Act, 1945, virtually to all buildings. I gathered that the hon. Member for Hornsey (Mr. Gammans) would have extended the principle even wider, to cover all wasting assets. What the cost of such a proposal would have been, I simply do not know. No doubt, it would be very much in excess of Lai million. When the object of the passing of the Income Tax Act of 1945 is considered, I feel that it cannot possibly be said that the time has arrived for any radical departure such as is now proposed from the principles upon which it was based. I would remind the House of what the then Chancellor of the Exchequer said on the Second Reading of the Income Tax Act, 1945. What he said then was:
"Let me, at this stage, say quite frankly that I know there will be some disappointment that the new allowances for buildings are to be confined in general to buildings used in productive industry and that, for example, offices and hotels are excluded; but I made it quite clear in my Budget speech of last year that my proposals would be deliberately framed in this way, in order to benefit productive and creative industry. The reasons that have led me to make this distinction will, f think, commend themselves to the House. I propose to the House that we should, as an act of conscious policy, deliberately weight the scales in favour of those forms of capital investment which are most necessary to the industrial strength of the community. It is productive or creative industry that produces in the main industrial employment and is the foundation of our national prosperity."—[OFFICIAL REPORT, 14th March, 1945; Vol. 409, c. 258–9.]
I submit to the House that every word of what was said then, applies with equal force now. To bring about a complete departure from that principle is what is now proposed. The new Clause would include all commercial and private buildings, and all private residences, and the hon. Member for Hornsey would include all wasting assets, I suppose of any kind. The right hon. Gentleman in 1945 said he would like to consider the matter further, but as events have turned out since then, obviously the case for this sort of relaxation on the very generous scale on which it is provided by the Income Tax Act, 1945, must be limited to those things which come high in the order of priority from the point of view of national necessity and usefulness in conducing to national prosperity. In the Finance Bill Debates in the autumn of 1945 limited proposals were made, and my right hon. Friend found himself not in a position to accept even those limited proposals which related to blacksmiths' shops and hotels. What is now proposed is not to make even any limited proposal for an innovation on the principles of the Act but to sweep them away wholesale. I have indicated the policy upon which that Act was passed. I submit that there is no reason now to depart from that very clear cut and well justified policy. I hope in view of the reasons I have given that the House will agree that no case has been made out for incurring an expenditure which can only be incurred to satisfy a very urgent public need.

Do I understand from what the Solicitor-General has just said that he is not contesting the principle but that, in view of the fact that he gave the House the figures of the loss of revenue which would occur, it is on a matter of finance rather than principle that he cannot accept the new Clause?

I thought I made it clear that I was not opposing this on any technical ground but solely on the question of principle.

The Solicitor-General does not accept the case although he admits this to be a wasting asset?

I think the House should be very grateful to my hon. Friend the Member for Sutton Coldfield (Sir. J. Mellor) for raising this matter and also to my hon. Friend the Member for Hornsey (Mr. Gammans). I was not at all surprised at the reply which we received from the hon. and learned Solicitor-General. I thought that there was a great deal of reason in it. I have always thought that this was a matter which must be dealt with at some time in the future. I quite appreciate that the enormous cost which would be imposed upon the Revenue by making this concession now is a difficulty which we cannot be surprised that the Chancellor is not prepared to overcome this year. I am not at all sure that it is quite so low in the order of priority from the point of view of the community as a whole as the hon. and learned Solicitor-General suggested. We have suffered in this country for a long time from buildings which have become much too old. There are other countries which have more modern systems of taxation where there is much more encouragement to pull down and rebuild buildings when they have ceased to be modern and convenient. If one walks about London one will see a large number of very old fashioned flats and offices and hotels which, had there been reasonable allowances for obsolescence, would by now have been renewed. I think that would be very much in the public interest.

6.0 p.m.

The Victorians, who were a very great people, did not understand obsolescence. They understood depreciation, but they did not understand obsolescence, because they built in such very substantial style that they could not imagine that it would ever come to an end. Nor, in fact, have many of their buildings come to an end; they are still there, almost too much so. It did not occur to the Victorians that there might come, a time when their buildings might be out of date, although structurally very strong and able to stand for many years to come.

The point which the hon. Baronet has made is a good one. It is only right that there should be an allowance for obsolescence in relation to buildings, whether hotels, offices or flats, just as much as in the case of factories dealt with under a priority by the right hon. Gentleman the Member for the Scottish Universities (Sir J. Anderson) in the Finance Act of 1945. I am very glad that the learned Solicitor-General has not opposed this except on the grounds of cost. He told us that he does not think it has a high priority, and that the Chancellor of the Exchequer cannot be expected to introduce it this year. I hope the Chancellor, after listening to what has been said on both sides of the House, will think about this matter before another year, and that he will see, when allocating his priorities on some future occasion, whether this cannot have a higher place than the Solicitor-General indicated. I suggest that this is something which will benefit all classes of the community and will enable this country to keep up its reputation.

I would like it to go on record that the case of a leaseholder is the case of a landlord in nearly every case, because he has the lease of premises for a certain number of years, and any benefit which came about as a result of any future concession would, in the majority of cases, go to the actual occupiers of the premises concerned.

I do not feel that we have had a satisfactory answer, but I do not desire to take the matter to a Division in view of the fact that the terms of the new Clause could not really be operated. I would therefore beg to ask leave to withdraw the Motion.

Motion and Clause, by leave, withdrawn.